Chapter 1

Introduction to
Quantitative Analysis

To accompany
Quantitative Analysis for Management, Tenth Edition,
by Render, Stair, and Hanna
Power Point slides created by Jeff Heyl

2008 Prentice-Hall, Inc.

2009 Prentice-Hall, Inc.

Introduction
Mathematical tools have been used for

thousands of years
Quantitative analysis can be applied to
a wide variety of problems
Its not enough to just know the
mathematics of a technique
One must understand the specific
applicability of the technique, its
limitations, and its assumptions
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Need for Operations

Management
The increased complexity of running a successful

business.

Many large companies with complex business

processes have used OM for years to help executives

and managers make good strategic and operational
decisions.
American Airlines and IBM have incredibly complex
operations in logistics, customer service and resource
allocation that are built on OM technologies.
As the trend of increased business complexity moves to
smaller enterprises, OM will play vital operational and
strategic roles.
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Need for OM
Lots of information, but no decisions.
Enterprise resource planning (ERP) systems and the
Web have contributed to a pervasive information
environment; decision-makers have total access to
every piece of data in the organization.
The problem is that most people need a way to
transform this wealth of data into actionable information
that helps them make good tactical and strategic
decisions.
The role of OM decision methods is to help leverage a
companys investment in information technology
infrastructure by providing a way to convert data into
actions.
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Need for OM
A large nationwide bank is using OM

techniques to configure complicated

financial instruments for their customers.
A process that previously required a human

agent and took minutes or hours to perform

is now executed automatically in seconds on
the banks Intranet.
The resulting financial products are far
superior to those produced by the manual
process.
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Need for OM
A major retail enterprise is using OM

methodology for making decisions about

customer relationship management
(CRM).
They are using mathematical optimization to

achieve the most profitable match between a

large number of customer segments, a huge
variety of products and services, and an
expanding number of marketing and sales
channels such
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Need for OM
Sears, Roebuck and Company
Manages a U.S. fleet of more than 1,000 delivery

vehicles, some company owned and some not.

The company makes more than 4 million deliveries a
year of 21,000 uniquely different items.
It has 46 routing offices and provides the largest home
delivery service of furniture and appliances in the
United States.
The company also operates a U.S. fleet of 12,500
service vehicles, together with an associated staff of
service technicians.
Service demand is on the order of 15 million calls per
year and revenue generated is approximately $3 billion.
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Need for OM
OM researchers designed a system to deal with such

variables as customer schedules and requested performance

times, time estimates for the required service, vehicles and
personnel available, skills needed, parts and product
availability and so on.
The system was designed to automatically schedule all facets
of performance in such a way as to
Provide accurate and convenient time windows for the
Sears customer
Minimize costs
Maximize certain objective measures of task performance,
including customer satisfaction.
This effort generated a one time cost reduction of $9 million
as well as ongoing savings of $42 million per year.
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Examples of Quantitative Analyses

Taco Bell saved over $150 million using

forecasting and scheduling quantitative

analysis models
NBC television increased revenues by
over $200 million by using quantitative
analysis to develop better sales plans
Continental Airlines saved over $40
million using quantitative analysis
models to quickly recover from weather
delays and other disruptions
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What is Quantitative Analysis?

Quantitative analysis is a scientific approach
to managerial decision making whereby raw
data are processed and manipulated
resulting in meaningful information

Raw Data

Quantitative
Analysis

Meaningful
Information

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What is Quantitative Analysis?

Quantitative factors might be different
investment alternatives, interest rates,
inventory levels, demand, or labor cost
Qualitative factors such as the weather,
state and federal legislation, and
technology breakthroughs should also be
considered
Information may be difficult to quantify but

can affect the decision-making process

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The Quantitative Analysis Approach

Defining the Problem
Developing a Model
Acquiring Input Data
Developing a Solution
Testing the Solution
Analyzing the Results
Figure 1.1

Implementing the Results

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Defining the Problem

Need to develop a clear and concise
statement that gives direction and meaning
to the following steps
This may be the most important and difficult

step
It is essential to go beyond symptoms and
identify true causes
May be necessary to concentrate on only a few
of the problems selecting the right problems
is very important
Specific and measurable objectives may have
to be developed
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Developing a Model

$ Sales

Quantitative analysis models are realistic,

solvable, and understandable mathematical
representations of a situation
b 1X
+
b
Y= 0

$ Advertising

There are different types of models

Scale
models

Schematic
models
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Developing a Model
Models generally contain variables

(controllable and uncontrollable) and

parameters
Controllable variables are generally the
decision variables and are generally
unknown
Parameters are known quantities that
are a part of the problem

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Acquiring Input Data

Input data must be accurate GIGO rule
Garbage
In
Process
Garbage
Out
Data may come from a variety of sources such as
company reports, company documents, interviews,
on-site direct measurement, or statistical sampling
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Developing a Solution
The best (optimal) solution to a problem

is found by manipulating the model

variables until a solution is found that is
practical and can be implemented
Common techniques are
Solving equations
Trial and error trying various approaches

and picking the best result

Complete enumeration trying all possible
values
Using an algorithm a series of repeating
steps to reach a solution
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Testing the Solution

Both input data and the model should be
tested for accuracy before analysis and
implementation
New data can be collected to test the model
Results should be logical, consistent, and

represent the real situation

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Analyzing the Results

Determine the implications of the solution
Implementing results often requires change

in an organization
The impact of actions or changes needs to
be studied and understood before
implementation

Sensitivity analysis determines how much

the results of the analysis will change if
the model or input data changes
Sensitive models should be very thoroughly

tested

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Implementing the Results

Implementation incorporates the solution
into the company
Implementation can be very difficult
People can resist changes
Many quantitative analysis efforts have failed

because a good, workable solution was not

properly implemented

Changes occur over time, so even

successful implementations must be
monitored to determine if modifications are
necessary
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Modeling in the Real World

Quantitative analysis models are used
extensively by real organizations to solve
real problems
In the real world, quantitative analysis

models can be complex, expensive, and

difficult to sell
Following the steps in the process is an
important component of success

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How To Develop a Quantitative

Analysis Model
An important part of the quantitative

analysis approach
Lets look at a simple mathematical
model of profit
Profit = Revenue Expenses

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How To Develop a Quantitative

Analysis Model
Expenses can be represented as the sum of fixed and
variable costs and variable costs are the product of
unit costs times the number of units
Profit = Revenue (Fixed cost + Variable cost)
Profit = (Selling price per unit)(number of units
sold) [Fixed cost + (Variable costs per
unit)(Number of units sold)]
Profit = sX [f + vX]
Profit = sX f vX
where
s = selling price per unit
f = fixed cost

v = variable cost per unit

X = number of units sold
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How To Develop a Quantitative

Analysis Model
Expenses can be represented as the sum of fixed and
variable costs and variable
costs are the
product
of
The parameters
of this
model
unit costs times the number
units
are f, v,ofand
s as these are the
inputscost
inherent
in the cost)
model
Profit = Revenue (Fixed
+ Variable
The
decision
variable
Profit = (Selling price
per
unit)(number
of of
units
interest
X
sold) [Fixed
cost +is(Variable
costs per
unit)(Number of units sold)]
Profit = sX [f + vX]
Profit = sX f vX
where
s = selling price per unit
f = fixed cost

v = variable cost per unit

X = number of units sold
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Bagels R Us
Assume you are the new owner of Bagels R Us and you want to
develop a mathematical model for your daily profits and
breakeven point. Your fixed overhead is $100 per day and your
variable costs are 0.50 per bagel (these are GREAT bagels). You
charge $1 per bagel.

Profits = Revenue - Expenses

(Price per Unit)
(Number Sold)

- Fixed Cost

- (Variable Cost/Unit)
(Number Sold)

Profits = $1*Number Sold - $100 - $.50*Number Sold

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Breakeven Example
f=$100, s=$1, v=$.50
X=f/(s-v)
X=100/(1-.5)
X=200
At this point, Profits are 0
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Pritchetts Precious Time Pieces

The company buys, sells, and repairs old clocks.
Rebuilt springs sell for $10 per unit. Fixed cost of
equipment to build springs is $1,000. Variable cost
for spring material is $5 per unit.
s = 10
f = 1,000
v=5
Number of spring sets sold = X
Profits = sX f vX

If sales = 0, profits = $1,000

If sales = 1,000, profits = [(10)(1,000) 1,000 (5)(1,000)]
= $4,000
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Pritchetts Precious Time Pieces

Companies are often interested in their break-even
point (BEP). The BEP is the number of units sold
that will result in $0 profit.
0 = sX f vX,

or

0 = (s v)X f

Solving for X, we have

f = (s v)X
f
X= sv
BEP =

Fixed cost
(Selling price per unit) (Variable cost per unit)
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Pritchetts Precious Time Pieces

Companies are often interested in their break-even
point (BEP).
The
BEP is the
numberTime
of units
sold
BEP for
Pritchetts
Precious
Pieces
that will result in $0 profit.
BEP = $1,000/($10 $5) = 200 units
0 = sX f vX, or 0 = (s v)X f
Salesfor
of less
200 units of rebuilt springs
Solving
X, wethan
have
will result in a loss
f = (s v)X
Sales of over 200 unitsfof rebuilt springs will
result in a profit X =
sv
BEP =

Fixed cost
(Selling price per unit) (Variable cost per unit)
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Examples
1. Selling price $1.50, cost/bagel $.80,

fixed cost $250 Breakeven point?

2. Seeking a profit of $1,000, selling
price $1.25, cost/bagel $.50, 100
sold/day. What is fixed cost?
3. What selling price is needed to
achieve a profit of $750 with a fixed
cost of $75 and variable cost of $.50

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Examples
Seeing a need for childcare in her community, Sue decided to
launch her own daycare service. Her service needed to be
affordable, so she decided to watch each child for $12 a day.
After doing her homework, Sue came up with the following
financial information:
Selling Price (per child per day) $12
Operating Expenses (per month)
Insurance 400 + Rent 200 = Total OE $600

Costs of goods sold $4.00 per unit

Meals 2 @ $1.50 (breakfast & lunch)
Snacks 2 @ $0.50

How many children will she need to watch on a monthly basis

to breakeven?
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Examples
Applying the formula, we have:
$600/($12-$4) = 75
She has to have a total of 75 children in her program over
the month to breakeven.
If she is open only 20 days per month then she needs
75/20=3.75 children per day on the average.
Expenses per month $600 + 75*$4.00 = $900
Revenue per month 75*$12 = $900

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Advantages of Mathematical Modeling

1. Models can accurately represent reality
2. Models can help a decision maker
3.
4.
5.
6.

formulate problems
Models can give us insight and information
Models can save time and money in
decision making and problem solving
A model may be the only way to solve large
or complex problems in a timely fashion
A model can be used to communicate
problems and solutions to others
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Models Categorized by Risk

Mathematical models that do not involve

risk are called deterministic models

We know all the values used in the model

with complete certainty

Mathematical models that involve risk,

chance, or uncertainty are called

probabilistic models

Values used in the model are estimates

based on probabilities

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Computers and Spreadsheet Models

QM for Windows
An easy to use

decision support
system for use in
POM and QM
courses

This is the main

menu of
quantitative
models

Program 1.1
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Computers and Spreadsheet Models

Excel QMs Main Menu (2003)
Works automatically within Excel spreadsheets

Program 1.2A
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Computers and Spreadsheet Models

Excel QMs
Main Menu
(2007)

Program 1.2B
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Computers and Spreadsheet Models

Excel QM
for the
BreakEven
Problem

Program 1.3A
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Computers and Spreadsheet Models

Excel QM
Solution
to the
BreakEven
Problem

Program 1.3B
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Computers and Spreadsheet Models

Using
Goal Seek
in the
BreakEven
Problem

Program 1.4
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Computers and Spreadsheet Models

Using
Goal Seek
in the
BreakEven
Problem

Program 1.4
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Possible Problems in the

Quantitative Analysis Approach
Defining the problem
Problems are not easily identified
Conflicting viewpoints
Impact on other departments
Beginning assumptions
Solution outdated

Developing a model
Fitting the textbook models
Understanding the model
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Possible Problems in the

Quantitative Analysis Approach
Acquiring input data
Using accounting data
Validity of data

Developing a solution
Hard-to-understand mathematics
Only one answer is limiting

Testing the solution

Analyzing the results
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Implementation
Not Just the Final Step
Lack of commitment and resistance
to change
Management may fear the use of

formal analysis processes will

reduce their decision-making power
Action-oriented managers may want
quick and dirty techniques
Management support and user
involvement are important

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Implementation
Not Just the Final Step
Lack of commitment by quantitative
analysts
An analysts should be involved with

the problem and care about the

solution
Analysts should work with users and
take their feelings into account

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